Canada: Pressure For Change

The idea that banks should invest in large-scale replacement of
legacy systems has had some traction. Current core banking systems,
replacement proponents suggest, are decades old and simply
can't serve banks effectively anymore, on a host of levels.

Balancing the pace of core banking system conversion is key to
long-term sustainable advantage.

Certainly, a perfect systems turnover would yield operational
improvements and eventual cost reductions—but is that a
realistic prospect? Is it even realistic for the majority of banks
to implement wholesale retooling projects on systems that, in many
cases, remain highly stable and reliable?

While the replacement case has been strongly made, there is
growing resistance to the idea that it's an imminent industry
necessity. Banks are asking whether the advantages, at this point,
outweigh the risks. Even if legacy systems have obvious
limitations, it may be better to manage current needs with modular
sub-systems; develop a strategic long-term plan for the changeover
eventuality; and allow conversion technologies, expertise,
processes, and success rates to continue improving.

To make a decision that balances current system requirements and
cost management with the eventual necessity of change, banks should
consider the pressures driving change, key reasons to carefully
evaluate the process, and steps to take to prepare for the
future.

The Drivers of Change

The push to replace legacy systems is based on several
arguments, including:

Aging workforce—Core technologies
date back to the 80s, even the 70s. There are numerous
inefficiencies, and as the current IT workforce retires, companies
may be challenged to find staff that understands these systems
enough to maintain and run them.

Technology/scalability—Legacy
systems have difficulty handling the sheer volume and complexity of
today's data streams, applications, and network demands. It is
also difficult to incorporate new industry-standard technologies
and customer-centric applications into these often customized
systems.

Regulatory issues—As regulatory
changes demand access to more and different kinds of information,
legacy systems may not be designed to analyze the data as
requested, requiring expensive workarounds and potentially risking
non-compliance.

It's also possible that catastrophic events relating to
system failure, such as fraud or personal data breaches, could
affect ongoing operations, damage share price, or cause loss of
consumer confidence.

Total Overhaul is Not Totally Realistic

The push for immediate change has waned, though, as a host of
reasons to proceed warily have come to the fore:

Legacy systems are simply too pervasive and cross too many
different lines of business and geographies to be changed all at
once.

They are actually quite stable and reliable, supporting the
major transactional operations for most banks.

In the current climate, the enormous cost of replacement would
expose banks to risks they cannot afford, and that their
stakeholders will not accept.

For these reasons and more, many financial institutions are
discovering the wisdom of applying a multi-phased approach to
systems replacement, taking careful steps to plan each small
transition.

Consider the real-world example of a large Canadian bank trying
to merge customer activity to provide customer service
representatives with an at-a-glance view of each customer's
deposit, investment, and loan activity. To achieve this objective,
the bank needed to consolidate information from various legacy
source systems, driving it to replace one of its core lending
systems to ensure all new loans would contain the information
required for proper consolidation. However, given the massive
amounts of customer loan data being managed and manipulated, this
changeover presented the potential of serious loss of profit,
reputation, and customer confidence. To mitigate these risks, the
bank chose to simultaneously run its legacy and replacement systems
during a transition period—allowing existing lending
products to run out before decommissioning the legacy system.

What Should Banks Be Doing Now?

What are the practical steps banks should take to prepare
strategically for a system conversion process that will eventually
become inevitable?

Carefully assess the full range of complexities and challenges
involved in moving to new technologies. For instance:

If you cannot switch over to the new system in a single
procedure, the organization may have to support legacy as well as
new applications for a multi-year period.

Traditional retail product lines are usually supported by
legacy systems which have been modified over time to fit ongoing
business needs. Numerous custom code changes, patches, and
"bolt-on" modules are now very difficult to
separate—and equally as difficult to replace.

Instead of wholesale replacement, consider replacing as
required on an application-by-application basis.

Analyze the impact of conversion on costing and budget
processes.

Develop and implement more effective workforce strategies, such
as:

Training new staff to understand, operate, and maintain legacy
systems.

Encouraging a culture of acceptance around new systems
technology for senior staff.

In general, rather than planning a massive overhaul, banks
should undertake an ongoing risk assessment program, regularly
discussing conversion timelines at staff and strategy meetings.

With many core systems interlinked across the industry, banks
need to mutually engage in change initiatives. The payment system,
for instance, cannot be changed by one bank. It requires
industry-wide cooperation and coordination.

Build Consumer Confidence

If your underlying platforms are stable and reliable, it may be
wiser to spend current resources in other places, such as building
consumer confidence. That process begins with security. Certainly,
many of the Canadian banks have to some extent ventured beyond the
Canadian borders exploring growth opportunities. If your ultimate
conversion plans will coincide with a global growth initiative,
it's absolutely critical to demonstrate to customers that
global systems will be reliable and secure. Otherwise they will
turn to more regional and local banking relationships where they
feel their money and information are safe from cross-border
compromise. The same holds true for the increasing popularity of
mobile banking. Customer loyalty will follow security.

It's a Decision, Not an Imperative

The decision will be different for every bank. You must
self-assess, but accurately, taking a range of factors into
account. For most banks, immediate wholesale change is unrealistic.
For many, particularly smaller businesses, moving too quickly may
raise unwarranted risks and exposures. Some banks are ready and
have a comprehensive plan, but hesitancy is a legitimate
response.

There is a clear case to be made for legacy system replacement,
but it's far from a case closed. With customer confidence still
strained by recent economic events, banks need to carefully balance
the pressures and risks of fast change with the advantages of an
evolving process, then take the steps that are right for their
situation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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